June CPI Drop Could Trigger Stock Market Surge, Multiple Rate Cuts

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The release of the June consumer price index report on Thursday is expected to be a pivotal moment for the stock market, according to Tom Lee of Fundstrat. In a recent video to clients, Lee explained that he anticipates the report will reveal a significant drop in inflation, potentially boosting the stock market and compelling the Federal Reserve to implement more than two interest rate cuts this year.

Lee described the upcoming week as a “reckoning” for how investors perceive inflation and the broader economic landscape. He noted that Fundstrat’s clients generally fall into three groups: those expecting a second wave of inflation, those believing the Fed will cut rates due to a weakening economy rather than controlled inflation, and those concerned about the increasing risk of an economic hard landing.

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However, Lee posits a fourth perspective, which is less common but gaining traction: the notion that inflation is decreasing rapidly, making Fed rate cuts beneficial and favorable for stocks. “I think there’s a good chance that if the data plays out the way we think it will this week, more people will join this view,” Lee added.

Historically, monthly CPI reports have instigated week-long stock market rallies when inflation cooled faster than expected in December, April, and May. Economists predict that core CPI for June will rise by 0.21% month-over-month. Lee argues that any figure below 0.25% would likely push stock prices higher. “Anything below 0.25% is a positive,” Lee emphasized, pointing out that a reading between 0.20% and 0.25% would be one of the lowest in the past year, apart from May’s 0.16%.

Lee insists that a soft June CPI would solidify the idea that inflation is falling significantly. “I think the number of expected cuts will exceed two,” he noted. According to Lee, if the June CPI comes in lower than expected, the number of anticipated rate cuts will increase, benefiting the stock market. He advises sticking to investments that are currently performing well, such as those in AI, weight loss drugs, the financial sector, bitcoin, and related exchanges. Lee is also optimistic about small-cap stocks, which have lagged behind the broader market rally this year.

JPMorgan’s trading desk concurs with the expectation that a light June CPI report will lift stock prices. In a recent note, the bank projected a 35% likelihood that inflation would increase by 0.15% to 0.20% month-over-month, potentially driving the stock market up by 0.50% to 1%. Andrew Tyler of JPMorgan mentioned that multiple former Fed governors have suggested September as a suitable time for a rate cut, reinforcing their tactically bullish stance, albeit with slightly less conviction.